It’s crazy how much panic ensues the first time an article online mentions the word “recession”. There is always an asshole predicting the next recession is going to start tomorrow. And unlike predicting the end of the world, some people actually “get it right” because recessions aren’t all that rare. Sure, we never know when they are going to start, but what we do know is they will happen. No one wants to lose half of their portfolio value, but it’s a worthy tradeoff to occasionally lose temporary value in our portfolio to get the long term gains that always occur. There are always people that say the next “recession” is imminent, and when it comes we’ll all lose our jobs, our wives, our happiness, and our money! Sounds pretty awful, right? There are two things I want to stress here. First, recessions are going to happen. They happen in almost every decade. The most recent one in 2007-2008 was considered a very bad one. Here is a list of every US recession that has occurred, and as you can see there’s a nice column for “time since last recession” and we tend to see that they usually happen about every 6 years over the long haul.
Let’s give a backdated example of an investor starting out at the worst possible time, when the market was highest in 2007 and watch what happens when the recession hits. We’ll use 3 dates here: October 2007 when market was high, February 2009 when market reached its low point, and November 2015 to show present day value. These are approximate dates/numbers so don’t fault me for stock prices or dividend payouts.
Invest $25,000 in Coca-Cola
2007: Bought 833 shares @ $30 per share, Total Value = ~$25,000
2009: Recession occurs; stock drops to $20 per share, and makes 833 shares worth ~ $16,500 (plus dividends received)
2015: Present Day, stock price rises to $42 per share, 833 shares now worth ~ $35,000
Dividends received using 3% annual approximation = $6,000
Total Value = ~$41,000 (64% return)
Invest $25,000 in Johnson & Johnson
2007: Bought 379 shares @ $66 per share, Total Value = ~$25,000
2009: Recession occurs; stock drops to $48 per share, and makes 379 shares worth ~ $18,200 (plus dividends received)
2015: Present Day, stock price rises to $102 per share, 379 shares now worth ~ $38,600
Dividends received using 3% annual approximation = $6000
Total Value = ~$44,600 (78% return)
These examples are obviously not useful to you today, as you don’t have a time machine (that I know of). However, it illustrates the following investing principles:
Recessions happen. And as you can see from the list on Wikipedia, they aren’t all that uncommon. The way to be prepared for them is to only invest money you don’t need in the short term. Always keep an emergency fund for tough times
NEVER sell stock during a recession. You are literally throwing money away by selling your stock beneath their true value.
BUY when people panic. You can see in these examples we had great prices on both Coca-Cola and Johnson & Johnson stock in 2009. If you were fortunate enough to buy consistently throughout the recession, you might be getting close to doubling that investment by 2015.
Remember your portfolio represents temporary value. You aren’t actually losing a large chunk of your money when a recession hits, only temporary value.
Strong Dividend Stocks continue to pay during a recession. Coca-Cola and Johnson & Johnson continued the same dividend payments and even raised them during these rough years. It’s a good starting point to see which companies did this and assume they can do it again when the next recession hits us.
If you invest with a plan and anticipate recessions, they shouldn’t worry you in the least. We’ll continue to receive our dividend payments on a monthly basis to make ourselves feel motivated. This is another prime example of why we should be using our dividend income as our “progress meter”, instead of portfolio value, which can vary greatly depending on the overall economy. Plan ahead, save your money, and sleep well at night while you work toward your financial goals!